Want to improve your productivity? Invest in intangibles
Higher productivity leads to economic growth. As such, it is high on both industry and the UK Government’s agenda. But what should organisations be investing in if they want to boost productivity? Although it may be tempting to think that investing in physical capital will boost productivity, the Organisation for National Statistics (ONS) industry data shows that investing in intangibles such as employee training, R&D and software, can deliver real impact.
Generally, within economics, investments are categorised as being either physical or intangible investments. Physical investment includes machinery, equipment and buildings etc. On the other hand, intangible investments are things which you can’t touch, for example resources spent on software, developing new algorithms, research and development (R&D), training, branding, new design of products and processes, and intellectual property products (IPP).
In the digital age, an organisation’s equity often relies more on intangible rather than physical capital. Consequently, organisations are investing more in intangible capital than ever before. The question is, does investing more in intangibles have an impact on an organisation’s productivity, and are there some types of intangible investments which boost productivity more than others?
Source: Author’s calculations using ONS Experimental estimates of investment assets in the UK. Change in intensity of intangible investment and output per worker from 2007 to 2018
Analysis of the ONS industry data shows that an increase in intangible investment per worker correlates to increased productivity. It also shows that training, software, and R&D have a greater impact than some other intangible investments. This is highlighted within the figure. Here the four sectors shown in the top right corner - transport, manufacturing sectors, professional and scientific activities, and the information and communication sector - have all invested heavily in training, software, and R&D.
In contrast, industries that have focused their intangible investment on branding, and organisational capital - financial services, wholesale retail and trade - present a minor productivity increase. Most importantly, services with declining productivity – accommodation, food services, electricity and gas supply, and agriculture - are associated with shrinkages in intangible investment.
What does this mean for companies? Consistent with previous studies, my findings show that employees' training is correlated to productivity growth and highlight the importance of upskilling and reskilling the workforce to successfully embark on their digital journey. For a more detailed looked at this research go to the Institute for Policy Research (IPR) Blog.
Author’s profile
Dr Aida Garcia Lazaro is an economist and researcher with the Made Smarter Innovation: Centre for People-led Digitalisation based within the Institute for Policy Research at the University of Bath. Aida's research is concentrated on the impact of digitalisation, technological change on labour market opportunities, skills gaps in the UK.
If you would like further information on this research please email: p-ld@bath.ac.uk
